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The informational role of algorithmic traders in the option market

Author

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  • Rohini Grover

    (Indira Gandhi Institute of Development Research)

Abstract

This paper investigates the information role of algorithmic traders (AT) in the Nifty index option market. I analyse a unique dataset to test for information-based trading by looking at the effect of net buying pressure options on implied volatilities. According to the direction-learning hypothesis, (directional) informed investors' net buying pressure of calls (puts) raises the implied volatilities of calls (puts) and lowers the implied volatilities of puts (calls). In addition, their net buying pressure can also predict future index returns. According to the volatility-learning hypothesis, (volatility) informed investors' net buying pressure is always positively related to implied volatilities. I find that these relations do not hold for AT and, therefore, infer absense of information-based trading by AT. On the contrary, I find the direction-learning hypothesis to hold for non-AT who, in this market, are primarily individual investors.

Suggested Citation

  • Rohini Grover, 2015. "The informational role of algorithmic traders in the option market," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2015-012
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2015-012.pdf
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    References listed on IDEAS

    as
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    2. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
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    More about this item

    Keywords

    mplied Volatility; Net buying pressure; Index option market;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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